The U.S. Labor Market Lacks Dynamism

July 15, 2014

The United States labor market is seeing little turnover, and James Pethokoukis of the American Enterprise Institute explains why this lack of dynamism is a serious problem.

An economy needs to do more than just create jobs, says Pethokoukis. A job market needs turnover, as workers move around from job-to-job, finding the best fit and, as a result, becoming more productive and boosting their wages. A workforce that stays put indicates a problem:

A workforce that is less dynamic is likely to see weak wage growth, because workers are not in the jobs in which they could be most productive. In the aggregate, this productivity impact is significant.

When the labor market has low turnover, the unemployed are at risk of being locked out of the job market.

Net job growth is simply the measure of hiring minus separations -- and job growth is possible both with high and low turnover. As such, it is not a sufficient way to measure the health of a labor market. A market with growth but low turnover indicates that American workers are less productive and are seeing lower wages and higher rates of long-term joblessness.

Since 2000, the United States has seen a huge decline in labor market dynamism, with drops during and after the two most recent recessions, according to a report from Goldman Sachs. There has been little improvement in the turnover rate during the recoveries associated with those recessions.